On September 12, 2018, the Senate confirmed, by a vote of 64-33, Charles P. Rettig to be Commissioner of the Internal Revenue for the term expiring November 12, 2022. We previously discussed the nomination of Mr. Rettig and his background here.

The IRS Commissioner presides over the United States’ tax system and is responsible for establishing and interpreting tax administration policy and for developing strategic issues, goal and objectives for managing and operating the IRS. This includes responsibility for overall planning, directing, controlling and evaluating IRS policies, programs, and performance. The IRS Commissioner is also required by statute under Internal Revenue Code (Code) Section 7803 to ensure that all IRS employees are familiar with and act in accord with the Taxpayer Bill of Rights.

The nomination of Michael J. Desmond to be Chief Counsel of the Internal Revenue Service (IRS) remains pending in the Senate. We previously discussed the nomination of Mr. Desmond and his background here.

The IRS Chief Counsel serves as the chief legal advisor to the IRS Commissioner on all matters pertaining to the interpretation, administration, and enforcement of the Internal Revenue Code, as well as all other legal matters. Attorneys in the IRS Chief Counsel’s Office serve as lawyers for the IRS. Their role is to provide the IRS and taxpayers with guidance on interpreting Federal tax laws correctly, represent the IRS in litigation, and provide all other legal support required to carry out the IRS mission

Presented below is our summary of significant IRS guidance and relevant tax matters for the week of August 20 – 24, 2018:

August 21, 2018: The IRS and Treasury released Notice 2018-67, which provides guidance regarding separately calculating the unrelated business taxable income (UBTI) of each trade or business conducted by a tax-exempt entity. Section 512(a)(6), enacted as part of tax reform, requires this separate calculation by tax-exempt organizations with more than one unrelated trade or business.

August 21, 2018: The IRS and Treasury released Notice 2018-68, which provides guidance regarding new section 162(m). Section 162(m), enacted as part of tax reform, limits the deduction for compensation paid by a publicly traded corporation to a covered employee. The notice provides guidance regarding the “grandfather” exception for certain compensation arrangements in effect on November 2, 2017. See our commentary for more information.

August 22, 2018: The IRS released Revenue Procedure 2018-44, which provides guidance regarding accounting method changing resulting from the revocation or termination of an entity’s S corporation status. Revenue Procedure 2018-44 adds such accounting method changes to the list of “automatic changes” listed in Revenue Procedure 2018-31.

August 22, 2018: The IRS published a draft Form 8992 for computing global low-taxed intangible income and a draft Form 8993 for computing foreign derived intangible income.

August 23, 2018: The IRS published proposed regulations providing guidance regarding the availability of a charitable deduction when the taxpayer also receives (or expects to receive) a state or local tax credit for the contribution.

August 24, 2018: The IRS made it clear that US citizens and residents that are contractors or employees of contractors supporting US Armed Forces are eligible for the section 911 foreign earned income exclusion.

August 24, 2018: The IRS released its weekly list of written determinations (e.g., Private Letter Rulings, Technical Advice Memorandum and Chief Counsel Advice).

Special thanks to Kevin Hall in our DC office for this week’s roundup.

The first New York meeting of McDermott’s Tax in the City® initiative in 2018 coincided with the June 21 issuance of the US Supreme Court’s (SCOTUS) highly anticipated Wayfair decision. Just before our meeting, SCOTUS issued its opinion determining that remote sellers that do not have a physical presence in a state can be required to collect sales tax on sales to customers in that state. McDermott SALT partner Diann Smith relayed the decision and its impact on online retailers to a captivated audience. Click here to read McDermott’s insight about the decision.

The event also featured a CLE/CPE presentation on the ethical considerations relative to tax reform by Kristen Hazel, Jane May and Maureen O’Brien, followed by a roundtable discussion on recent tax reform insights led by Britt Haxton, Sandra McGill, Kathleen Quinn and Diann Smith. Below are a few takeaways from last week’s Tax in the City® New York:

  • Supreme Court Update: Wayfair – Jurisdiction to Tax – The 5-4 opinion concluded that the physical presence requirement established by the Court in its 1967 National Bellas Hess decision and reaffirmed in 1992’s Quill is “unsound and incorrect” and that “stare decisis can no longer support the Court’s prohibition of a valid exercise of the States’ sovereign power.” This opinion will have an immediate and significant impact on sales and use tax collection obligations across the country and is something every company and state must immediately and carefully evaluate within the context of existing state and local collection authority. Click here to read McDermott’s insight about the decision.
  • Tax Reform: Ethical Considerations – Because of tax reform, taxpayers face increased uncertainty and will likely face increased IRS/state scrutiny for their 2017 and 2018 returns. Therefore, it’s crucial for taxpayers to be intentional about post-reform planning and compliance by coordinating among various departments (federal tax, state and local tax, employee benefits, treasury, operations, etc.). Taxpayers should understand the weight of various IRS and state revenue authority guidance, the IRS’s authority to issue retroactive regulations within 18 months of passing legislation, and how to take reasonable positions in the absence of guidance. They should also understand that the IRS is allowed more than three years to assess tax, even when there is an omission of global intangible low taxed income (GILTI) or when the tax relates to the Section 965 transition tax.
  • Tax Reform Changes to Employee Compensation and Benefit Deductions – Post-tax reform, all employees of US public companies, private companies with US publicly traded debt, and foreign issuers with ADRs traded on the US market are covered employees subject to the $1 million limit for deductible compensation. Though a grandfather rule applies if existing contracts are not materially modified, key questions about how to apply this rule remain. Tax reform eliminated the employer deduction for transportation subsidies (other than bicycle subsidies). It also reduced employers’ ability to deduct meal and entertainment expenses, and removed employers’ and employees’ ability to deduct moving expenses.
  • False Claims Act and Starbucks – False Claims Act actions involving state tax issues are becoming more and more prevalent. These actions are concerning because state laws often provide for treble damages and/or per occurrence penalties. Read more about McDermott’s win in the Starbucks case here.
  • GILTI’s Effect on State and Local Tax – There is much to-do about GILTI at the state level. Be sure to monitor state legislation and administrative guidance concerning the inclusion of GILTI in the state tax base in the states that are important to your business. The state-level guidance is evolving every day.

We invite all tax professionals who identify as female to continue the conversation and share tax developments with the official LinkedIn group for Tax in the City®! Click here to join.

The next Tax in the City® meetings will take place in the Fall of 2018, in Chicago, New York, Seattle and our inaugural event in Dallas. Please contact Mia Dubinets if you would like to be added to any of the regional Tax in the City® mailing lists, and register for the upcoming events.

Just 10 days after his inauguration, President Trump signed Executive Order 13771, establishing the tenet of deregulation to be adopted by the Trump administration. Executive Order 13771 outlined the Trump administration’s vision for reducing regulation and controlling regulatory costs, and established a principle that for every one new regulation issued at least two prior regulations be identified for elimination — the “one in, two out” principle. President Trump’s Call for Reducing Tax Regulatory Burdens.

Access the full article.

Originally published in Law360, June 2018.

The second meeting of McDermott’s Tax in the City® initiative in Seattle was held on May 22, 2018 at the Amazon headquarters. McDermott established Tax in the City® in 2014 as a discussion and networking group for women in tax aimed to foster collaboration and mentorship, and to facilitate in-person connections and roundtable events around the country. With the highest attendance rate of any Tax in the City® event to date, the May meeting featured a CLE/CPE presentation about Ethical Considerations around Tax Reform by Elizabeth Chao, Kirsten Hazel, Jane May and Erin Turley, followed by a roundtable discussion about recent tax reform insights led by Britt HaxtonSandra McGill and Diann Smith.

Here’s what we covered at last week’s Tax in the City® Seattle:

  • Tax Reform: Ethical Considerations – Because of tax reform, taxpayers face increased uncertainty and will likely face increased IRS/state scrutiny for their 2017 & 2018 returns. Therefore, it’s crucial for taxpayers to be intentional about post-reform planning and compliance, including by coordinating among various departments (federal tax, state and local tax, employee benefits, treasury, operations, etc.). Taxpayers should understand the weight of various IRS/state revenue authority guidance, the IRS’s authority to issue retroactive regulations within 18 months of passing legislation, and how to take reasonable positions in the absence of guidance. They should also understand when the IRS has longer than three years to assess tax, including when there is an omission of global intangible low taxed income (GILTI) or when the tax relates to the section 965 transition tax.
  • Tax Reform Changes to Employee Compensation and Benefit Deductions – Post-tax reform, all employees of US public companies, private companies with US publicly traded debt, and foreign issuers with ADRs traded on the US market are covered employees subject to the $1 million limit for deductible compensation. Though a grandfather rule applies if existing contracts are not materially modified, key questions about how to apply this rule remain. Tax reform eliminated the employer deduction for transportation subsidies (other than bicycle subsidies). It also reduced employers’ ability to deduct meal and entertainment expenses, and removed employers’ and employees’ ability to deduct moving expenses.
  • Supreme Court Update: Wayfair – Jurisdiction to Tax – Following the Wayfair oral arguments, it is difficult to predict whether the Supreme Court will uphold as constitutional South Dakota’s tax on online retailers. Wayfair raises the fundamental question of when the courts should settle tax issues, and when they should wait for Congress to act.
  • Interaction of Cross-Border Tax Reform Provisions – Income of a US multinational is subject to varying rates of US tax depending on where it is earned. The US parent’s income from selling to US customers will be subject to the full rate of 21 percent and its income from selling to foreign customers will generally be subject to the foreign derived intangible income (FDII) rate of 13.125 percent. If the income is earned by a controlled foreign corporation (CFC), then amounts above a deemed tangible asset return generally will be subject to 10.5 percent US tax as GILTI. Taxpayers cannot analyze these provisions in isolation. Because the new provisions sometimes interact in unintuitive ways, it is crucial to do models to determine the impact of various transactions. For instance, if the US parent must pay a royalty to a CFC, then that payment may cause the base erosion and anti-abuse tax (BEAT) to apply, which could eliminate any tax benefit from having an intangible return earned by the CFC.
  • Tax Reform: Spotlight on Partnerships – Several tax reform provisions do not clearly indicate how they apply to partnerships. One key question is whether the 50 percent GILTI deduction should be applied at the partner or partnership level.
  • EU Proposal to Tax Income from Digital Commerce – On March 21, the European Commission made two proposals regarding the taxation of digital activities in the EU. First, it proposed expanding the definition of permanent establishment (PE) to include companies that have no physical presence in a country but meet a minimum threshold of annual revenues or users there (a digital PE).  Second, it proposed a 3 percent tax on gross revenues from the sale of data generated from user-provided information, digital activities which allow users to interact with one another, and online advertising.

We invite all tax professionals who identify as female to continue the conversation and share tax developments with the official LinkedIn group for Tax in the City®! Click here to join.

The next Tax in the City® meeting will take place in New York on June 21. Please contact Mia Dubinets if you’d like to be added to the New York Tax in the City® mailing list, and register for the June event. Additionally, stay tuned for information regarding an inaugural Dallas Tax in the City® meeting in fall 2018!

The Internal Revenue Service (IRS) has been busy in recent months working on implementing the recent tax reform legislation. The latest announcement by the IRS focuses on the $10,000 cap on the amount of state and local taxes that can be deducted for federal income tax purposes. In a press release and release of guidance in the form of Notice 2018-54, the IRS announced that proposed regulations will be issued addressing this issue to help taxpayers understand the relationship between federal charitable contribution deductions in exchange for a tax credit against state and local taxes owed. The press release, Notice and forthcoming proposed regulations are in response to workarounds by various high property tax states allowing local governments to set up charitable organizations that can accept property tax statements. Based on these materials, it is anticipated that the IRS will disagree with the workarounds:

The Treasury Department and the IRS intend to propose regulations addressing the federal income tax treatment of transfers to funds controlled by state and local governments (or other state-specified transferees) that the transferor can treat in whole or in part as satisfying state and local tax obligations. The proposed regulations will make clear that the requirements of the Internal Revenue Code, informed by substance-over-form principles, govern the federal income tax treatment of such transfers. The proposed regulations will assist taxpayers in understanding the relationship between the federal charitable contribution deduction and the new statutory limitation on the deduction for state and local tax payments.

The IRS’s website provides information on the latest IRS news releases, fact sheets and statements. Additionally, we have a dedicated webpage with insights on significant developments related to tax reform.

Wrapping Up March – and Looking Forward to April

Top March Posts You May Have Missed

White House Intends to Nominate Michael J. Desmond to High-Level Roles in the IRS and the Department of Treasury

The IRS May Be Coming for Your Bitcoins

Tax Court Judicial Conference This Week in Chicago

Upcoming Tax Controversy Activities in April

Our lawyers will present on key tax topics during the month of April. We hope to see you soon.

April 24, 2018: Todd Welty, Kristen Hazel, Elizabeth Erickson, John Lutz and Andrew Roberson will present “Taking Reasonable Positions and Retroactive Regulations” at McDermott’s Inaugural Tax Symposium in our Chicago office. The panel will address Gottesman, the ability of IRS to issue retroactive regulations, IRS authority issues, and impacts on return positions.

Led by our senior practitioners, our 2018 Symposium is a must-attend event for senior tax and employee benefits leaders seeking to optimize the opportunities and navigate the risks brought about by tax reform legislation.

April 30, 2018: Thomas Jones will present “Captive Insurance Tax Reform Update” at the Captive Insurance Council of the District of Columbia in Washington, DC. Captive Insurance has undergone a number of changes since the tax reform movement and our partner Tom Jones will cover the new regulations that your organization should be aware of.

The Tax Act created two new foreign tax credit limitation baskets – one for foreign branch income (new section 904(d)(1)(B)) and one for any amount includible in gross income under section 951A (i.e., GILTI) – however, it failed to amend section 904(d)(2)(H)(i) to reflect these changes to section 904(d)(1). As a result of this oversight, section 904(d)(2)(H)(i) currently instructs the taxpayer to treat foreign taxes imposed on amounts that do not constitute income under US principles as imposed on income described in the foreign branch income basket. In light of legislative history and Treasury regulations, such a failure to amend the Code appears to be a drafting error. This article addresses the relevant case law that, on balance, supports applying section 904(d)(2)(H)(i) as if its language and cross-reference had been properly amended.

Access the full article.

A shrinking Internal Revenue Budget (IRS) budget has meant that fewer agents are available to make sure that the tax laws are being enforced. We have reported previously about how Congress has decreased the IRS’s budget.  In 2017, the audit rate fell to its lowest levels in 15 years because of a shrinking IRS budget and workforce. Indeed, your chance of being audited fell to 0.6% in 2017, the lowest rate since 2002. Similarly, tax collection levies fell 32% from the prior year, and the IRS filed 5% fewer liens year-over-year. Detailed information from the IRS can be found here.

Practice Point. The decreased funding of the IRS in the wake of bipartisan disagreements seems to have quelled in recent weeks. We have seen movement to get the IRS more funding in the wake of tax reform but it remains to be seen whether some of those funds will be used to increase the enforcement functions of the IRS. We anticipate, however, an increase in enforcement activity as a result of some of the positions taken by taxpayers in anticipation of tax reform and the myriad of interpretive questions that are expected to result from the new tax laws.

On February 7, 2018, the Department of the Treasury (Treasury) released its second quarter update to the 2017-2018 Priority Guidance Plan to identify tax issues it believes should be addressed through regulations, revenue rulings, revenue procedures, notices and other published administrative guidance. The Priority Guidance Plan contains projects the Treasury hopes to complete during the 12-month period from July 2, 2017 through June 30, 2018. We previously posted on the first quarter 2017-2018 Priority Guidance plan here.

Most of the projects do not involve the issuance of new regulations, instead focus on guidance to taxpayers on a variety of tax issues important to individuals and businesses in the form of: (1) revocations of final, temporary, or proposed regulations (for our prior coverage, see here); (2) notices, revenue rulings and revenue procedures; (3) simplifying and burden reducing amendments to existing regulations; (4) proposed regulations; or (5) final regulations adopting proposed regulations. The initial 2017-2108 Priority Guidance Plan consisted of 198 guidance projects, 30 of which have already been completed. The second quarter update reflects 29 additional projects, including priority items as a result of the Tax Cuts and Jobs Act (TCJA) legislation enacted on December 22, 2017, and guidance published or released from October 13, 2017 through December 31, 2017.

Continue Reading IRS Releases Second Quarter Update to 2017-2018 Priority Guidance Plan